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No-one wants to believe that the business venture they entered into with a partner (or partners) isn't going to work out. However, life can and often does get in the way. The business may need to close, a partner might pass away or one of the partners may decide they want out.
In such cases, you'll need to draft up a partnership dissolution agreement to make the process easier and for peace of mind that everything will be handled fairly and in a way that's legally correct. Our guide explains how partnership dissolution agreements work and the helpful role of customisable legal templates.
What's in this guide?
- What is a partnership dissolution agreement?
- Find partnership dissolution agreement templates
- When to use a partnership dissolution agreement
- Partnership dissolution agreement vs memorandum of understanding
- What does a partnership dissolution agreement include and not include?
- How effective is this type of agreement?
- Using a lawyer to help you out
- How do I write a partnership dissolution agreement?
- More on where to get legal templates and services online
What is a partnership dissolution agreement?
When people enter into a business partnership together, they bring certain assets and debts to the table. As the business grows, each partner will also usually have different obligations and invest different things into the company. A partnership dissolution agreement is meant to recognise these inputs and divide the remaining assets, debts and responsibilities fairly between all partners.
This type of formal agreement can also ensure that neither partner will be liable for new debts created by either individual, and neither can use the other person's name or assets for new business deals.
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When to use a partnership dissolution agreement
There are many reasons why you might want to have a partnership dissolution agreement in place. You could have one drafted proactively in case a partner dies, one of the partners wants to sell their ownership of the business or the business goes under. Basically, it can be useful in any circumstance where you may need to divide up the remaining debts and assets of a company. And so any time you and a business partner stop working together, you'll want to have a legal document to provide a clear separation of ownership.
A partnership dissolution agreement is especially helpful when you don't have a formal partnership agreement in place, or the agreement you have doesn't make provisions for ending the partnership. This is not applicable to a larger corporation that has a shareholders' agreement in place.
Partnership dissolution agreement vs memorandum of understanding
Both a partnership dissolution agreement and a memorandum of understanding indicate an agreement on a certain course of action between the parties involved. That's about where the similarities end.
While a memorandum of understanding can be used in the process of ending a partnership, as it documents a broader scope of each party's intentions, it isn't legally binding. It can go into deeper detail, outlining the particular fine points, but it's seen as a helpful tool towards reaching an understanding and not a formal agreement. This document can also be used for various purposes and not just the ending of a partnership.
A partnership dissolution agreement is a formal contract that is specifically tailored to detailing the division of ownership between two or more parties. It's typically considered to be a stronger option for those who are concerned about any legal implications and want to make sure they have their bases covered.
What does a partnership dissolution agreement include and not include?
Since the document defines a timeline of dissolution and outlines the responsibilities of every party, as well as the division of assets, it can get fairly complex and long depending on the circumstances.
Keep in mind that a partnership dissolution agreement will also look somewhat different if it's being drafted proactively if, say, a partner dies.
- Percentage of ownership and each partner's role
- Length of partnership and assets/debt each brought into the business
- List of all assets/debt accrued in the duration of ownership
- Timeline for the dissolution
- Plan for how assets will be liquidated and distributed
- Plan for how any remaining debt will be dissolved
- Terms for the agreement
- Each partner's responsibilities
- Legal implications of the termination of the partnership
- Sale of interest (should one partner sell their ownership of the business).
Typically not included
- Changes to legal details outlined in a partnership agreement
- New changes to the partnership agreement between remaining partners.
How effective is this type of agreement?
Partnership dissolution agreements can be very effective as they are legally binding between the partners of a company. A well-drafted agreement that sets clear terms can help make the process of ending a partnership much easier.
A good partnership dissolution agreement can help to do the following:
- Clearly define assets and liabilities between partners
- Provide a structure to how ownership is transferred or dissolved
- Avoid potential legal and financial issues
- Provide a clear way for each partner to protect their interests.
Using a lawyer to help you out
Strictly speaking, a lawyer doesn't have to be involved in writing a Partnership Dissolution Agreement, but they can be very helpful. For an agreement to hold legal weight in Australia, it has to adhere to the Partnership Act and different legislative requirements that differ by state. A lawyer should be able to advise you on the comprehensiveness of your document and ensure that its contents fall within the scope of the law.
How do I write a partnership dissolution agreement?
In order to write a clear and effective partnership dissolution agreement, you'll need to include different clauses that cover each relevant issue to the partnership ending. It's important to be as specific and comprehensive as possible. Every partner has to weigh in and agree on the details of the document as well, so, your first draft will likely not look the same as your final document.
It may be a good idea to refer to a sample document or template to ensure you've included everything that's necessary, but remember that your business is unique and a standard template may not cover everything you need it to.
More on where to get legal templates and services online
- LegalVision. You can get unlimited access to all of the documents offered by LegalVision, for a monthly membership fee of $199.
- Business-in-a-Box. Access nearly 2,000 document templates for $309 billed annually. The company also has a free trial.
- Wonder.Legal. Take advantage of a library with more than 280 document templates that can be bought for a once-off fee. You can download a Partnership Dissolution Agreement from the website for free, but it cannot be edited beyond entering relevant details.
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